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Gold_Outlook_Bearish_as_Fed_Talks_End_of_QE-_1626_Critical_Support_body_Picture_1.png, Gold Outlook Bearish as Fed Talks End of QE- 1626 Critical Support Gold Outlook Bearish as Fed Talks End of QE- 1626 Critical Support

Fundamental Forecast for Gold: Bearish

  • Gold to Rise as Oil Falls if NFP, ISM Miss Estimates
  • Crude Oil and Gold May Correct Lower Before NFP, ISM
  • Oil at Risk but Gold May Rise on US GDP, FOMC Outcomes
Gold recouped a portion off the losses sustained last week with the previous metal advancing 0.68% this week to trade at $1670 at the close of trade in New York on Friday. The gains come on the back of a continued rally in risk assets with equity markets closing out their strongest January performance in nearly over a decade as the US recovery looks to gather pace in 2013.

At face-value, US economic data this week looked to be quite alarming with the read on Q4 GDP showing an unexpected contraction of 0.1% and NFPs on Friday missing consensus estimates with a print of 157K. However a deeper look into these metrics reveals a very different picture. Although the headline print showed a contraction in GDP, the report did show personal consumption increasing 2.2% amid projections for a 2.1% print, while disposable income was the largest since2Q 2008 even as the savings rate increased to 4.7% from 3.6% during the three-months through September. Coupled with the largest decline in Government spending since 1972, the slight contraction was largely dismissed by market participants with equity markets closing out the week near their highs.

Friday's NFP print was also a curve ball with the headline figure missing consensus estimates for a gain of 165K as the unemployment rate unexpectedly rose to 7.9% from 7.8%. Again here the underlying metrics paint a very different picture with broadening of the labor force, brought about by returning discouraged workers, contributing to the uptick in the nominal rate. An upward revision of last month's read by some 40K jobs also suggests a more broad based recovery ahead for the labor market and as such, expectations for cessation of Fed easing should start to gather pace. In light of the recent developments, St. Louis Fed President James Bullard, who serves on the FOMC in 2013, floated the idea that the committee may slow its asset purchases or bring quantitative easing to and end as the recovery gradually gathers pace and possibly ahead of the 6.5% unemployment threshold.

Although the economic docket for the U.S. remains fairly light for the week ahead, the shift in the Fed's policy outlook should continue to undermine demand for gold, and the European Central Bank (ECB) interest rate decision set for February 7 may further limit the upside for the precious metal should President Mario Draghi strike an improved outlook for the region. However, as euro-area faces record-high unemployment paired with the persistent slack in the real economy, the Governing Council may show a greater willingness to carry out its easing cycle throughout 2013 in an effort to lift the region out of recession. In turn, a more downbeat ECB may spur increase the appeal of gold as market participants move away from the single currency, but we will maintain our bearish forecast for bullion as a growing number of Fed officials adopt a more hawkish tone for monetary policy.

From a technical standpoint, gold has continued to trade within the confines of a well-defined descending channel formation dating back to the October highs with critical resistance seen holding at the long-term 61.8% Fibonacci extension taken from the December 2011 and May 2012 lows at $1693. So long as this level is respected, gold remains at risk for further declines with a break below trendline support dating back to the June 28th low (currently around $1655) exposing key support at the 61.8% retracement taken from the rally off the 2011 low (lowest level of the move off the record high) at $1626. This level remains paramount for the yellow metal and if compromised, opens up the floor to declines into the $1585 region. Note that daily RSI has continued to hold below the 50-threshold with a move below 40 risking substantial losses. -MB

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